Big and small telcos: EU merger policy, between domestic and cross-border consolidation

Today’s news, that Telenor and TeliaSonera are going to abandon the planned merge of their Danish assets, will play a pivotal role in the incoming years. The nordic companies have decided to make a step back following the conditions imposed by the European Commission (and specifically by DG COMP offices lead by commissioner Vestager) in order to clear the transaction. Vestager, a Danish politician (what a case!) commented the move of the companies in the following way: “EU merger control has to make sure that company tie-ups do not lead to reduced innovation, higher prices or reduced choice for consumers and do not restrict competition in the internal market”. In other words, Vestager has confirmed the view that the mergers amongst the Danish mobile operators (the number 2 end 3 in terms of market shares) would have been detrimental for the Danish consumers. The remedies required to clear the transaction, i.e. MVNO access and the sale of spectrum to a new mobile operator, were necessary to compensate the lost of a player in the market. In the Commission’s view, un der the circumstances of the Danish mobile market is not possible to reduce the number of mobile operators from 4 to 3.

In the last years the European telecom market has been characterized by a sort of merger-mania, with many telcos advocating for the need to consolidate in national markets and reduce the number pf players, in order to save costs and increase margins. The most notable operations happened in the mobile sectors in Austria, Germany and Ireland, where the number of (network) mobile operators was reduced from 4 to 3. Since most of the European mobile national markets have 4 operators, a debate has started whether the reduction from 4 to 3 would be detrimental for competition or there might be remedies able to compensate the lost of an operator. The European Commission, lead by the precedessor of Vestager, Joachim Almunia, cleared the Austria, German and Irish transactions by imposing remedies that, however, have now proven to be ineffective: on one side, the obligation to offer spectrum did not work and no new (fourth) mobile operator entered the market; on the other side, the remedies in favor of MVNOS did not work properly and competition by these operators was quite weak. As a result, prices have been increasing in the Austrian mobile market and similar effects are expected now also from Germany and Ireland.

Vestager has probably considered these market effects and, taking into account the views of DG COMP offices (more than Almunia did), she started a more strict approach, aiming at making sure that the mobile consolidation do not affect competition. However, this could mean, in practice, to definitively stop the mobile consolidation in Europe within domestic borders, because it is clear that the planned mergers for now (in Italy and UK) have not other reasons than increasing margin and profits in domestic markets, while the potential benefits for investments and innovation are absolutely theoretical. In other words, the chances for H3G to merge in Italy with Wind and with Telefonica (O2) in UK are today definitely weaker.

The main argument played by European telcos for the mobile consolidation is about investments: reducing the number of players at domestic level, or increasing their size via a merger, would be necessary to invest in infrastructures, in light of the migration to 4G or further technologies. DG COMP has been always skeptical about this, however. Fact is, until now the presence of 4 mobile operators in the market has never affected investments, as the historical data show. Because of the strong infrastructure competition and the rapid growth of mobiles services, investing rapidly was necessary for any player. However, what changed with respect to the past was the profitability: with the end of high profits with sms and voice (due to the gradual phasing out of mobile termination tariffs) a s well as international roaming surcharges, the mobile sector profits have been going down, although they remain higher than in most of other markets. The problem is, however, when you are used for years to have champagne and caviar, you do not accept to be back to a normal menu. This is the problem of European mobile telcos.

Vestager’s mission could bother other European commissioners and stakeholders which are claiming consolidation in order to create bigger telecom players in the EU, to invest more and compete at global level. However, what Vestager is doing makes absolutely sense: to achieve these targets (creating big players and bla bla) European companies should consolidate at cross-border level, rather than merging domestic assets. Cross-border consolidation would be the only way to become really big and support the creation of a Single Digital Market in the EU. Nevertheless, European telcos continue to play consolidation more as a rhetoric argument and they prefer to be big in (small) domestic market rather than playing at global level by merging with operators of various countries. This is the reason why Vestager is right.